State and Local Retirement Plans in the United States

State and Local Retirement Plans in the United States

Robert L. Clark, Lee A. Craig and John Sabelhaus

State and Local Retirement Plans in the United States explains how economic and political events have shaped the development of pension plans in the last century, and it argues that changes in the structure and generosity of these plans will continue to shape policy and funding in the future. It also brings to bear a new rationale to the policies behind public sector pension plans. The authors use the history of how early public pension plans were established, how they matured and how they have grown in generosity to analyse what changes may be expected in years to come. Unique in its scope, this comprehensive history of the development of public sector pension plans in the United States during the twentieth century expands upon current ideas relating to the changing economic environment, the passage and evolution of social security, and the expansion of the public sector.

Chapter 10: Public Pensions in the Twenty-first Century

Robert L. Clark, Lee A. Craig and John Sabelhaus

Subjects: economics and finance, public sector economics, social policy and sociology, ageing

Extract

The preceding chapters chronicle the development of public pension plans throughout the twentieth century. The history of public sector retirement plans shows that initially most public pensions began as disability or forced savings plans; while others began as awards to career employees given through special legislation enacted by the state legislature or, in the case of federal employees, the US Congress. By the middle of the twentieth century, the federal government and the majority of the states, as well as the country’s largest cities, had shifted to traditional defined benefit pension plans. Up until the mid-1970s, the development of public pension plans paralleled the dominance of defined benefit plans in the private sector of the economy. Beginning in the 1970s, employers in the private sector started terminating their defined benefit plans and converting them into defined contribution plans, especially 401(k) plans (Clark and McDermed, 1990; Gustman and Steinmeier, 1992; Ippolito, 1995). This process continued over the next 30 years. Today, defined contribution plans are the dominate type of pension offered by private employers. In addition, many firms that have retained a defined benefit plan have converted their traditional plans to cash-balance plans that, in many ways, are similar to defined contribution plans. In contrast, defined benefit plans still remain the norm in the public sector, as only a few states have terminated their defined benefit plans, and adopted a defined contribution plan as the sole, primary retirement plan for their public employees. The dominance of defined benefit plans in...

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